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The Joint Cross Section of Stocks and Options

58 Pages Posted: 8 Jan 2010 Last revised: 27 Feb 2012

Andrew Ang

BlackRock, Inc

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici

Fordham University

Multiple version iconThere are 4 versions of this paper

Date Written: March 1, 2010

Abstract

Option volatilities have significant predictive power for the cross section of stock returns and vice versa. Stocks with large increases in call implied volatilities tend to rise over the following month whereas increases in put implied volatilities forecast future decreases in next-month stock returns. The spread in average returns and alphas between the first and fifth quintile portfolios formed by ranking on lagged changes in implied call volatilities is approximately 1% per month. Going in the other direction, stocks with high returns over the past month tend to have call option contracts that exhibit increases in implied volatility over the next month, but realized volatility tends to decrease. The results are consistent with the slow diffusion of information across option and underlying equity markets and are suggestive of informed trading occurring in both asset markets.

Keywords: implied volatility, risk premiums, return predictability, momentum

JEL Classification: G10, G11, C13

Suggested Citation

Ang, Andrew and Bali, Turan G. and Cakici, Nusret, The Joint Cross Section of Stocks and Options (March 1, 2010). AFA 2011 Denver Meetings Paper; Fordham University Schools of Business Research Paper No. 2010-003. Available at SSRN: https://ssrn.com/abstract=1533089 or http://dx.doi.org/10.2139/ssrn.1533089

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

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